Merck & Co (MRK) 25Q2 Update

25Q2 sales decreased 1.9% to $15.8 billion and were 0.8% below my estimate.  GARDASIL sales declined by $1.3 billion or 55%, hurt by a lack of pull through in China.  (Thus, the company’s suspension of shipments to China will continue through the balance of the year.)  Otherwise, global sales grew 7%, led by KEYTRUDA and new medicines, including WINREVAIR and CAPVAXIVE.  The sales shortfall was partially offset by a 100 bp increase in gross margin, due to sales mix, but operating expense increased by 4%, due to a $200 million charge for a license agreement and higher spending to support the company’s pipeline.  Thus, GAAP diluted EPS fell 17.8% to $1.76, below my estimate of $1.84.  Non-GAAP diluted EPS decreased by 6.5% to $2.13, below my estimate of $2.16.  However, non-GAAP EPS exceeded the consensus estimate of $2.10.

Despite the weaker-than-anticipated results, management narrowed its guidance range for 2025 revenues from $64.1-$65.6 billion to $64.3-$65.3 billion and raised the low end of its non-GAAP EPS guidance range from $8.82-$8.97 to $8.87-$8.97.  With the updated guidance, my forecast for 2025 sales is unchanged at $64.8 billion, but I have lowered my GAAP EPS estimate from $7.80 to $7.59, due in part to the company’s recently announced multi-year $3.0 billion restructuring program, and raised my non-GAAP EPS estimate slightly from $8.88 to $8.90.  For 2026, I am now forecasting revenue of $69.3 billion (down from $70.9 billion, previously), GAAP EPS of $8.09 (down from $8.49) and non-GAAP EPS of $9.30 (down from $9.42).  I see Merck’s cash increasing from $13.2 billion in 2024 to $14 billion in 2025 and then to $27.7 billion, lower than my previous forecast.  If realized, at least some of the cash will be deployed in business development transactions, including acquisitions, or possibly increased share repurchases.

Since my previous report (2/26), Merck’s stock has risen 3.4%, worse than the S&P 500’s 7.4% advance, but better than the 0.9% drop in the NYSE ARCA Pharmaceutical Index.  Pharmaceutical stocks remain out of favor due to uncertainty regarding tariffs and a recent push by the Trump administration to obtain most favored nation pricing.  Investors also remain concerned about KEYTRUDA’s loss of exclusivity in 2028.  Yet, the company’s pipeline has the potential to generate significant sales, which should allow it to navigate through the KEYTRUDA LOE period successfully.

The stock reached an intraday high of $85.22 on July 25, two trading days before it reported earnings on July 29, but it subsequently fell 8.8% on the open after releasing earnings, and then rallied back to close down only 1.7% on the day.  Since then, however, it has fallen another 3.9%, but it has shown signs of stabilizing over the past five trading sessions.  Despite the modest earnings disappointment, I am maintaining my price target of $90, which is equivalent to 11.1 times projected 2026 GAAP EPS of $8.09, and 9.7 times 2026 non-GAAP EPS of $9.30.  That is below the peer group average multiple for one-year forward non-GAAP earnings of 11.9.  At the current price of $79.44, the total return potential is 17.4%, including the 4.1% dividend yield.  Thus, I am also maintaining my performance rating of “1” (Buy).

This is a summary of my recent update report on Merck & Co., Inc. (MRK). To obtain a copy of the report, please reach out to me using the contact information provided below.

August 8, 2025 (Report published on August 6, 2025.)

Stephen P. Percoco
Lark Research
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